Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 1-13105

(Exact name of registrant as specified in its charter)

Delaware

43-0921172

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification Number)

One CityPlace Drive, Suite 300, St. Louis, Missouri

63141

(Address of principal executive offices)

(Zip code)

Registrants telephone number, including area code: (314) 994-2700

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At November 5, 2008, there were 142,863,179 shares of the registrants common stock
outstanding.

The accompanying unaudited condensed consolidated financial statements include the accounts of
Arch Coal, Inc. and its subsidiaries and controlled entities (the Company). The Companys primary
business is the production of steam and metallurgical coal from surface and underground mines
located throughout the United States, for sale to utility, industrial and export markets. The
Companys mines are located in southern West Virginia, eastern Kentucky, Virginia, Wyoming,
Colorado and Utah. All subsidiaries (except as noted below) are wholly-owned. Intercompany
transactions and accounts have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial
reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management,
all adjustments, consisting of normal, recurring accruals considered necessary for a fair
presentation, have been included. Results of operations for the three and nine month periods ended
September 30, 2008 are not necessarily indicative of results to be expected for the year ending
December 31, 2008. These financial statements should be read in conjunction with the audited
financial statements and related notes as of and for the year ended December 31, 2007 included in
Arch Coal, Inc.s Annual Report on Form 10-K filed with the U.S. Securities and Exchange
Commission.

The Company owns a 99% membership interest in a joint venture named Arch Western Resources,
LLC (Arch Western) which operates coal mines in Wyoming, Colorado and Utah. The Company also acts
as the managing member of Arch Western.

2. Accounting Policies

Accounting Pronouncements Adopted

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (Statement No. 157). Statement No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements under
other accounting pronouncements that require or permit fair value measurements. Statement No. 157
was adopted prospectively for the Companys financial instruments. The FASB deferred the effective
date of Statement No. 157 for one year for nonfinancial assets and liabilities that are recognized
or disclosed at fair value in the financial statements on a nonrecurring basis, which the Company
will adopt effective January 1, 2009.

On January 1, 2008, Statement of Financial Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115
(Statement No. 159) became effective. Statement No. 159 permits entities the choice to measure
certain financial instruments and other items at fair value. The Company did not elect to measure
any additional financial instruments or other items at fair value.

On January 1, 2008, the Company adopted Staff Position FIN 39-1, Amendment of FASB
Interpretation 39 (FSP FIN 39-1). FSP FIN 39-1 permits a reporting entity to offset fair value
amounts recognized for the right to reclaim or the obligation to return cash collateral against
fair value amounts recognized for derivative instruments executed with the same counterparty under
the same master netting arrangement that have been offset. The Company did not elect to net amounts
related to cash collateral with the fair value of derivatives with the same counterparty. The
Companys current liability for the obligation to return cash collateral was $5.7 million and $3.0
million at September 30, 2008 and December 31, 2007, respectively.

Accounting Standards Issued and Not Yet Adopted

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51
(Statement No. 160). Statement No. 160 requires that a noncontrolling interest (minority
interest) in a consolidated subsidiary be displayed in the consolidated balance sheet as a separate
component of equity. The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the consolidated statement of income. Statement
No. 160 also includes expanded disclosure requirements regarding the interests of the parent and
its noncontrolling interest. Statement No. 160 is effective for fiscal years beginning on or after
December 15, 2008.

Early adoption is not allowed. The Company does not expect that the adoption of Statement No.
160 will have a material impact on the Companys financial position or results of operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No.
133 (Statement No. 161). Statement No. 161 requires additional disclosures about derivatives and
hedging activities, including qualitative disclosures about objectives for using derivatives. It
also requires tabular disclosures about gross fair value amounts of derivative instruments, gains
and losses on derivative instruments by type of contract, and the locations of these amounts in the
financial statements. Statement No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application encouraged. The
Company is currently assessing Statement No. 161 to determine the impact of the new disclosure
requirements.

In June 2008, the FASB issued Staff Position No. EITF 03-6-01 Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-01) to
clarify whether instruments granted in share-based payment transactions are participating
securities prior to vesting and therefore need to be included in the earnings allocation in
computing earnings per share under the two-class method. FSP EITF 03-6-01 is effective
retrospectively for the Company for financial statements issued for interim periods of fiscal years
beginning after December 15, 2008, and earlier application is not permitted. The Company is
assessing FSP EITF 03-6-01 to determine its impact on earnings per share.

In October 2008, the FASB issued Staff Position FAS 157-3 Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3), effective upon
issuance. FSP FAS 157-3 clarifies the application of FASB Statement No. 157 in a market that is
not active and provides an example to illustrate key considerations in determining the fair value
of a financial asset when the market for that financial asset is not active. The Company does not
expect that the adoption of FSP FAS 157-3 will have a material impact on the Companys financial
position or results of operations.

3. Fair Value Measurements

Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs.



Level 1 is defined as observable inputs such as quoted prices in active markets for
identical assets. Level 1 assets include available-for-sale equity securities and coal
futures that are submitted for clearing on the New York Mercantile Exchange that may
ultimately be settled either physically or financially.



Level 2 is defined as observable inputs other than Level 1 prices. These include
quoted prices for similar assets or liabilities in an active market, quoted prices for
identical assets and liabilities in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities. The Companys level 2 assets and liabilities
include commodity contracts (coal and heating oil) with quoted prices in
over-the-counter markets or direct broker quotes.



Level 3 is defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions. These include the
Companys commodity contracts (primarily coal and heating oil) valued using modeling
techniques, such as Black-Scholes, that require the use of inputs, particularly
volatility, that are not observable.

The table below sets forth, by level, the Companys financial assets and liabilities that are
accounted for at fair value:

Fair value at September 30, 2008

Total

Level 1

Level 2

Level 3

(In thousands)

Assets:

Available-for-sale investments

$

1,388

$

1,388

$



$



Derivatives

94,068

25,530

65,207

3,331

Total assets

$

95,456

$

26,918

$

65,207

$

3,331

Liabilities:

Derivatives

$

32,841

$



$

33,774

$

(933

)

The Companys contracts with certain of its counterparties allow for the settlement of
contracts in an asset position with contracts in a liability position in the event of default or
termination. For classification purposes, the Company records the net fair value of all the
positions with these counterparties as a net asset or liability. Each level in the table above
displays the underlying contracts according to their classification in the accompanying condensed
consolidated balance sheet, based on this counterparty netting.

The following table summarizes the change in the fair values of financial instruments
categorized as level 3.

Three Months Ended

Nine Months Ended

September 30, 2008

September 30, 2008

(In thousands)

Beginning balance

$

24,317

$

3,256

Realized and unrealized gains (losses) recognized in earnings

(6,494

)

15,457

Realized and unrealized gains (losses) recognized in other
comprehensive income

(3,069

)

2,622

Settlements, purchases and issuances

(10,490

)

(17,071

)

Ending balance

$

4,264

$

4,264

Net unrealized gains during the three and nine months ended September 30, 2008 related to
level 3 financial instruments held on September 30, 2008 were $0.5 million and $1.4 million,
respectively.

4. Coal Trading

The Company holds physical forward contracts, options and financial swaps, some of which are
held for trading purposes. The Companys assets and liabilities related to its coal trading
portfolio at fair value are as follows:

September 30,

December 31,

2008

2007

(In thousands)

Assets

$

79,604

$

8,532

Liabilities

(23,544

)



Net fair value of coal trading contracts

$

56,060

$

8,532

The change in the fair value of the Companys coal trading portfolio during the nine months
ended September 30, 2008 was primarily the result of increases in coal pricing during the year.
The timing of the estimated future settlements of the trading portfolio is 17% in the remainder of
2008, 61% in 2009 and 22% in 2010. These coal trading assets and liabilities are classified as Coal
derivative assets and Coal derivative liabilities, respectively, in the accompanying condensed
consolidated balance sheets.

5. Property Transactions

On September 28, 2007, the Company purchased coal reserves and surface rights in Illinois for
$38.9 million.

On June 29, 2007, the Company sold select assets and related liabilities associated with its
Mingo Logan-Ben Creek mining complex in West Virginia to a subsidiary of Alpha Natural Resources,
Inc. for $43.5 million. For the nine months ended September 30, 2007, the Companys former Mingo
Logan-Ben Creek operations contributed coal sales of 1.2 million tons, revenues of $75.1 million
and income from operations of $9.1 million. The Company

recognized a net gain of $9.1 million in the third quarter of 2007 resulting from the
transaction. That amount has been reflected in other operating income, net in the accompanying
condensed consolidated statements of income for the three and nine months ended September 30, 2007.
This gain was net of accrued losses of $12.5 million on firm commitments to purchase coal through
2008 to supply below-market sales contracts that can no longer be sourced from the Companys
operations and approximately $5.0 million of employee-related payments, which were paid in 2007.

During the nine months ended September 30, 2007, the Company also sold non-strategic reserves
in the Powder River Basin and Central Appalachia and recognized gains on the sales of $6.0 million
and $2.4 million, respectively, reflected in other operating income, net in the accompanying
condensed consolidated statements of income.

6. Stock-Based Compensation

During the nine months ended September 30, 2008, the Company granted options to purchase 0.8
million shares of common stock with a weighted average exercise price of $53.06 and a weighted
average grant-date fair value of $21.34 per share. The options fair value was determined using
the Black-Scholes option pricing model, using a weighted average risk-free rate of 2.87%, a
weighted average dividend yield of 0.54% and a weighted average volatility of 45.59%. The options
vest ratably over three years. The options provide for the continuation of vesting for
retirement-eligible recipients that meet certain criteria. The expense for these options will be
recognized through the date that the employee first becomes eligible to retire and is no longer
required to provide service to earn part or all of the award. The Company also granted 74,250
shares of restricted stock and restricted stock units during the nine months ended September 30,
2008 at a weighted average grant-date fair value of $53.30 per share. The restricted stock and
restricted stock units vest over a period ranging from approximately two to four years.

During the nine months ended September 30, 2008, stock price and EBITDA performance
measurements were satisfied under the Companys performance-contingent phantom stock awards, and
the Company issued 0.2 million shares of common stock and paid cash of $3.5 million under the
awards.

The Company recognized stock-based compensation expense from all plans of $2.4 million and
$1.4 million for the three months ended September 30, 2008 and 2007, respectively, and $10.4
million and $5.3 million for the nine months ended September 30, 2008 and 2007, respectively. This
expense is primarily included in selling, general and administrative expenses in the accompanying
condensed consolidated statements of income.

7. Inventories

Inventories consist of the following:

September 30,

December 31,

2008

2007

(In thousands)

Coal

$

49,169

$

61,656

Repair parts and supplies, net of allowance

124,693

116,129

$

173,862

$

177,785

8. Income Taxes

During the third quarter of 2008, the Company reached a settlement with the IRS regarding the
Companys treatment of the acquisition of the coal operations of Atlantic Richfield Company
(ARCO) and the simultaneous combination of the acquired ARCO operations and the Companys Wyoming
operations into the Arch Western joint venture. The settlement did not result in a net change in
deferred tax assets, but involved a re-characterization of deferred tax assets, including an increase in net
operating loss carryforwards of $145.1 million and other amortizable assets which will provide provide
additional tax deductions through 2013. A portion of these future cash tax benefits accrue to ARCO
pursuant to the original purchase agreement, including $6.8 million that was recorded as goodwill
during the third quarter of 2008 and must be paid within 120 days of the settlement. No amounts
were paid prior to September 30, 2008.

This settlement and the related increase in net operating loss carryforwards and amortization
deductions triggered a reassessment of the Companys ability to realize its deferred tax assets. As
a result of the reassessment, which incorporated the impact of strengthened coal markets compared
to 2007, the Company reduced the valuation allowance related to alternative minimum tax credits and
net operating loss carryforwards by $52.6 million in the third quarter of 2008. The Companys
remaining valuation allowance of $0.3 million relates to state net operating losses.

During the nine months ended September 30, 2008 and the nine months ended September 30, 2007,
the Company reduced the valuation allowance related to state net operating loss carryforwards by
$4.7 million and $4.0 million, respectively, resulting from a change in managements assessment of
the Companys ability to utilize these net operating loss carryforwards due to tax law changes in
West Virginia.

9. Debt

September 30,

December 31,

2008

2007

(In thousands)

Commercial paper

$

98,060

$

74,959

Indebtedness to banks under credit facilities

278,597

250,816

6.75% senior notes ($950.0 million face value) due July 1, 2013

956,490

957,514

Promissory note due 2009

5,813

8,450

Other

3,096

11,454

1,342,056

1,303,193

Less current maturities

385,566

217,614

Long-term debt

$

956,490

$

1,085,579

The current maturities of debt include amounts borrowed that are supported by credit
facilities that have a term of less than one year and amounts borrowed under credit facilities with
terms longer than one year that the Company does not intend to refinance on a long-term basis,
based on cash projections and managements plans. The Company had availability of approximately
$620.0 million under its credit facilities at September 30, 2008.

On April 11, 2008, the Company amended its commercial paper placement program and the related
revolving credit facility to increase the maximum aggregate principal amount outstanding to $100.0
million from $75.0 million.

On May 22, 2008, the Company entered into an amendment to its accounts receivable
securitization program increasing the program from $150.0 million to $175.0 million. The credit
facility supporting the borrowings under the program expires in June 2009.

10. Workers Compensation Expense

The following table details the components of workers compensation cost:

Three Months Ended

Nine Months Ended

September 30

September 30

2008

2007

2008

2007

(In thousands)

Self-insured occupational disease benefits:

Service cost

$

(289

)

$

327

$

361

$

982

Interest cost

(213

)

249

337

748

Net amortization

(2,012

)

(422

)

(2,912

)

(1,266

)

Total occupational disease

(2,514

)

154

(2,214

)

464

Traumatic injury claims and assessments

2,017

2,934

7,277

8,482

Total workers compensation expense

$

(497

)

$

3,088

$

5,063

$

8,946

The occupational disease cost was adjusted in the third quarter of 2008 to reflect revised
actuarial assumptions.

The following table details the components of other postretirement benefit costs:

Three Months Ended

Nine Months Ended

September 30

September 30

2008

2007

2008

2007

(In thousands)

Service cost

$

736

$

699

$

2,204

$

2,097

Interest cost

929

762

2,787

2,287

Amortization of prior service credit

865

415

2,594

1,246

Amortization of other actuarial gains

(911

)

(754

)

(2,733

)

(2,260

)

$

1,619

$

1,122

$

4,852

$

3,370

12. Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income items under Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, are transactions recorded in stockholders equity during the year, excluding
net income and transactions with stockholders.

The following table details the components of comprehensive income:

Three Months Ended

Nine Months Ended

September 30

September 30

2008

2007

2008

2007

(In thousands)

Net income

$

97,848

$

27,280

$

291,992

$

93,556

Other comprehensive income, net of income taxes:

Pension, postretirement and other
post-employment benefits, net of
reclassifications into net income

(613

)

702

(513

)

1,869

Available-for-sale securities, net of
reclassifications into net income

(287

)

(900

)

888

(1,640

)

Unrealized gains (losses) on derivatives, net
of reclassifications into net income

(14,999

)

766

(4,472

)

6,474

Total comprehensive income

$

81,949

$

27,848

$

287,895

$

100,259

Unrealized gains (losses) on derivatives relates to derivative financial instruments the
Company uses to manage exposures to changing commodity prices. The Company uses heating oil swaps
and purchased call options to reduce the risk of changes in the price of diesel fuel purchases. The
unrealized losses during the three months ended September 30, 2008 resulted from volatility in the
price of heating oil.

13. Capital Stock

During the three months ended September 30, 2008, the Company repurchased 1.5 million shares
of its common stock under the Companys share repurchase program at an average price of $35.62. At
September 30, 2008, approximately 10.9 million shares of the Companys common stock were available
for repurchase under the program. At September 30, 2008, $5.9 million remained payable related to
share purchases and is classified in accounts payable in the accompanying condensed consolidated
balance sheet.

In January, 2008, 84,376 shares of the Companys 5% Perpetual Cumulative Convertible Preferred
Stock (Preferred Stock) were converted into 404,735 shares of the Companys common stock. On
February 1, 2008, the Company redeemed the remaining 505 shares of Preferred Stock at the
redemption price of $50.00 per share.

14. Earnings per Share

The following table reconciles basic and diluted weighted average shares outstanding:

Three Months Ended

Nine Months Ended

September 30

September 30

2008

2007

2008

2007

(In thousands)

Basic weighted average shares outstanding

144,035

142,627

143,885

142,392

Effect of common stock equivalents under
incentive plans

863

1,116

917

1,087

Effect of common stock equivalents arising
from Preferred Stock



408

46

441

Diluted weighted average shares outstanding

144,898

144,151

144,848

143,920

15. Guarantees

The Company has agreed to continue to provide surety bonds and letters of credit for
reclamation and retiree healthcare obligations of Magnum Coal Company (Magnum) related to the
properties the Company sold to Magnum on December 31, 2005. The Purchase Agreement requires Magnum
to reimburse the Company for costs related to the surety bonds and letters of credit and to use
commercially reasonable efforts to replace the obligations. At September 30, 2008, the Company
had $92.5 million of surety bonds related to properties sold to Magnum. Patriot Coal Corporation
acquired Magnum in July 2008, and, as a result, Magnum will be required to post letters of credit
in the Companys favor for the full amount of the reclamation obligation on or before February
2010.

Magnum also acquired certain coal supply contracts with customers who have not consented to
the assignment of the contract from the Company to Magnum. The Company has committed to purchase
coal from Magnum to sell to those customers at the same price it is charging the customers for the
sale. In addition, certain contracts have been assigned to Magnum, but the Company has guaranteed
Magnums performance under the contracts. The longest of the coal supply contracts extends to the
year 2017. If Magnum is unable to supply the coal for these coal sales contracts then the Company
would be required to purchase coal on the open market or supply contracts from its existing
operations. At market prices effective at September 30, 2008, the cost of purchasing 14.5 million
tons of coal to supply the contracts that have not been assigned over their duration would exceed
the sales price under the contracts by approximately $665.4 million, and the cost of purchasing 4.1
million tons of coal to supply the assigned and guaranteed contracts over their duration would
exceed the sales price under the contracts by approximately $227.8 million. The Company has also
guaranteed Magnums performance under certain operating leases, the longest of which extends
through 2011. If the Company were required to perform under its guarantees of the operating lease
agreements, it would be required to make $7.0 million of lease payments. As the Company does not
believe that it is probable that it would have to purchase replacement coal or fulfill its
obligations under the lease guarantees, no liabilities have been recorded in the financial
statements as of September 30, 2008. However, if the Company would have to perform under these
guarantees, it could potentially have a material adverse effect on the business, results of
operations and financial condition of the Company.

In connection with the Companys acquisition of the coal operations of ARCO and the
simultaneous combination of the acquired ARCO operations and the Companys Wyoming operations into
the Arch Western joint venture, the Company agreed to indemnify the other member of Arch Western
against certain tax liabilities in the event that such liabilities arise prior to June 1, 2013 as a
result of certain actions taken, including the sale or other disposition of certain properties of
Arch Western, the repurchase of certain equity interests in Arch Western by Arch Western or the
reduction under certain circumstances of indebtedness incurred by Arch Western in connection with
the acquisition. If the Company were to become liable, the maximum amount of potential future tax
payments was $54.1 million at September 30, 2008, which is not recorded as a liability on the
Companys financial statements. Since the indemnification is dependent upon the initiation of
activities within the Companys control and the Company does not intend to initiate such
activities, it is remote that the Company will become liable for any obligation related to this
indemnification. However, if such indemnification obligation were to arise, it could potentially
have a material adverse effect on the business, results of operations and financial condition of
the Company.

The Company is a party to numerous claims and lawsuits with respect to various matters. The
Company provides for costs related to contingencies when a loss is probable and the amount is
reasonably estimable. After conferring with counsel, it is the opinion of management that the
ultimate resolution of pending claims will not have a material adverse effect on the consolidated
financial condition, results of operations or liquidity of the Company.

17. Segment Information

The Company has three reportable business segments, which are based on the major low-sulfur
coal basins in which the Company operates. Each of these reportable business segments includes a
number of mine complexes. The Company manages its coal sales by coal basin, not by individual mine
complex. Geology, coal transportation routes to customers, regulatory environments and coal quality
are generally consistent within a basin. Accordingly, market and contract pricing have developed by
coal basin. Mine operations are evaluated based on their per-ton operating costs (defined as
including all mining costs but excluding pass-through transportation expenses), and on other
non-financial measures, such as safety and environmental performance. The Companys reportable
segments are the Powder River Basin (PRB) segment, with operations in Wyoming; the Western
Bituminous (WBIT) segment, with operations in Utah, Colorado and southern Wyoming; and the Central
Appalachia (CAPP) segment, with operations in southern West Virginia, eastern Kentucky and
Virginia.

Operating segment results for the three and nine months ended September 30, 2008 and 2007 are
presented below. Results for the operating segments include all direct costs of mining. Corporate,
Other and Eliminations includes the change in fair value of coal derivatives and coal trading
activities, net; corporate overhead; land management; other support functions; and the elimination
of intercompany transactions.

A reconciliation of segment income from operations to consolidated income before income taxes
follows:

Three Months Ended

Nine Months Ended

September 30

September 30

2008

2007

2008

2007

(In thousands)

Income from operations

$

87,751

$

49,824

$

373,151

$

154,537

Interest expense

(17,019

)

(17,151

)

(56,228

)

(53,142

)

Interest income

235

513

1,128

1,637

Other non-operating expense



(806

)



(2,126

)

Income before income taxes

$

70,967

$

32,380

$

318,051

$

100,906

18. Subsequent Event

As part of the Emergency Economic Stabilization Act (the Act) enacted on October 3, 2008,
certain coal producers may file for black lung excise tax refunds on taxes paid on export sales
subsequent to October 1, 1990, along with interest computed at statutory rates. The Company has
filed for refunds under the Act and estimates the Company could receive up to $10.0 million, plus
interest of up to $11.0 million. The refunds are subject to approval by the IRS. As of September
30, 2008, no amounts had been recognized related to these tax refunds.

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

This document contains forward-looking statements  that is, statements related to future,
not past, events. In this context, forward-looking statements often address our expected future
business and financial performance, and often contain words such as expects, anticipates,
intends, plans, believes, seeks, or will. Forward-looking statements by their nature
address matters that are, to different degrees, uncertain. For us, particular uncertainties arise
from changes in the demand for our coal by the domestic electric generation industry; from
legislation and regulations relating to the Clean Air Act and other environmental initiatives; from
operational, geological, permit, labor and weather-related factors; from fluctuations in the amount
of cash we generate from operations; from future integration of acquired businesses; and from
numerous other matters of national, regional and global scale, including those of a political,
economic, business, competitive or regulatory nature. These uncertainties may cause our actual
future results to be materially different than those expressed in our forward-looking statements.
We do not undertake to update our forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required by law. For a description of
some of the risks and uncertainties that may affect our future results, see Risk Factors under
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007 and in the Quarterly
Reports on Form 10-Q that we file during the interim periods.

Overview

We are one of the largest coal producers in the United States, focused on mining, processing
and marketing coal with low sulfur content for sale to power plants, steel mills and industrial
facilities located primarily in the United States.

The locations of our mines enable us to ship coal to most of the major coal-fueled power
plants in the United States and provide access to key export terminals. Our three reportable
business segments are based on the low-sulfur U.S. coal producing regions in which we operate  the
Powder River Basin, the Western Bituminous region and the Central Appalachia region. These
geographically distinct areas are characterized by geology, coal transportation routes to
consumers, regulatory environments and coal quality. These regional similarities have caused
market and contract pricing environments to develop by coal region and form the basis for the
segmentation of our operations.

The Powder River Basin is located in northeastern Wyoming and southeastern Montana. The coal
we mine from surface operations in this region has a very low sulfur content and a low heat value
compared to the other regions in which we operate. The price of Powder River Basin coal is
generally less than that of coal produced in other regions because Powder River Basin coal is
generally lower in heat value, exists in greater abundance, and is easier to mine and thus has a
lower cost of production. Because Powder River Basin coal is generally lower in heat value, some
power plants must blend it with higher Btu coal or retrofit existing coal plants to accommodate
Powder River Basin coal. The Western Bituminous region includes western Colorado, eastern Utah and
southwestern Wyoming. Coal we mine from underground mines in this region typically has a low
sulfur content and varies in heat value. Central Appalachia includes eastern Kentucky, Virginia
and southern West Virginia. Coal we mine from both surface and underground mines in this region
generally has a high heat value and low sulfur content. In addition, we sell a portion of the coal
we produce in the Central Appalachia region as metallurgical coal. We are typically able to sell
metallurgical coal to customers in the steel industry at prices that exceed the price at which we
are able to sell steam coal to power plants and industrial facilities because metallurgical coal
has high heat content, low expansion pressure, low sulfur content and various other chemical
attributes.

In the third quarter of 2008, our earnings benefited substantially from coal prices that were
higher than the third quarter of 2007 and increased volumes of metallurgical coal sales. We
believe that growing domestic and international coal demand, along with persistent challenges in
augmenting global coal production, infrastructure and transportation networks, has led to a shift
in worldwide coal trade. Constrained global coal supply has allowed the United States to become a
more significant exporter of metallurgical and steam coal in 2008. A strengthening international
coal market has positively influenced domestic coal markets, and we expect that trend to continue,
despite a weakening global economy. Despite some deterioration in coal index pricing during the
third quarter of 2008, prices during the first nine months of 2008 were significantly higher than
prices in the prior year, due to increases in global and domestic coal-based electricity generation
and steel production, increases in net coal exports from the United States and production
difficulties, particularly in the Central Appalachian region. We believe these industry
fundamentals will continue in the long-term.

We have not yet priced a portion of the coal we plan to produce over the next two years in
order to take advantage of expected strong prices in the future. At September 30, 2008, our
expected unpriced production approximated between 30 million and 40 million tons in 2009 and
between 75 million and 85 million tons in 2010.

Our coal trading activities allow us to complement our underlying physical coal assets. We
utilize our experience in physical market transactions and our market intelligence to manage a
portfolio of physical and financial contracts to enable us to take advantage of coal market
movements. The fair value of our trading portfolio has increased significantly during the first
nine months of 2008 due to the favorable market conditions discussed previously, despite the
declining prices in the third quarter.

During the third quarter of 2008, we reached a settlement with the IRS regarding our treatment
of the acquisition of the coal operations of Atlantic Richfield Company (ARCO) and the
simultaneous combination of the acquired ARCO operations and our Wyoming operations into the Arch
Western joint venture. The settlement resulted in a
re-characterization of deferred tax assets that will
reduce our future taxable income and will provide additional tax deductions through 2013. This
settlement and the impact of the changes in deferred tax assets triggered a reassessment of our ability to
realize our deferred tax assets. As a result of the reassessment, which incorporated the impact of
strengthened coal markets compared to 2007, we reduced the valuation allowance related to
alternative minimum tax credits and net operating loss carryforwards by $52.6 million in the third
quarter of 2008.

Results of Operations

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Summary. Our results during the three months ended September 30, 2008 when compared to the
three months ended September 30, 2007 were influenced primarily by the stronger market conditions
and the impact of the reversal of $52.6 million of valuation allowance against deferred tax assets.
These factors were offset in part by upward pressure on commodity costs, unrealized losses related
to our trading activities and higher depreciation, depletion and amortization costs.

Revenues. The following table summarizes information about coal sales during the three months
ended September 30, 2008 and compares those results to the comparable information for the three
months ended September 30, 2007:

Three Months Ended September 30

Increase

2008

2007

$

%

(Amounts in thousands, except per ton data)

Coal sales

$

769,458

$

599,151

$

170,307

28.4

%

Tons sold

35,239

34,722

517

1.5

%

Coal sales realization per ton sold

$

21.83

$

17.26

$

4.57

26.5

%

Coal sales. Coal sales increased during the third quarter of 2008 from the third quarter of
2007 primarily due to higher price realizations across all segments and a greater percentage of
metallurgical coal sales in Central Appalachia. We have provided more information about the tons
sold and the coal sales realizations per ton by operating segment under the heading Operating
segment results beginning on page 15.

Expenses, costs and other. The following table summarizes expenses, costs, changes in fair
value of derivatives and coal trading activities, net and other operating (income) expense, net for
the three months ended September 30, 2008 and compares those results to the comparable information
for the three months ended September 30, 2007:

Cost of coal sales. Our cost of coal sales increased in the third quarter of 2008 from the
third quarter of 2007 primarily due to higher per-ton costs and the increase in sales volumes. The
higher costs include an increase in

transportation costs due to increased barge and export sales, higher sales-sensitive costs
resulting from the increase in price realizations and higher per-ton production costs in the Powder
River Basin. We have provided more information about our operating segments under the heading
Operating segment results below.

Depreciation, depletion and amortization. The increase in depreciation, depletion and
amortization expense from the third quarter of 2007 to the third quarter of 2008 is due primarily
to the costs of capital improvement and mine development projects that we capitalized in 2007 and
2008. We have provided more information about our operating segments under the heading Operating
segment results below and our capital spending in the section entitled Liquidity and Capital
Resources beginning on page 20.

Selling, general and administrative expenses. The increase in selling, general and
administrative expenses from the third quarter of 2007 to the third quarter of 2008 is due
primarily to an increase in employee incentive compensation costs of $4.4 million and an increase
in industry group dues of $2.1 million. The increase in employee compensation costs results
primarily from anticipated payouts under plans that are dependent upon profitability and also due
to expenses related to option grants. These increases were offset in part by a decrease of $5.9
million in expenses associated with our deferred compensation plan, which results primarily from
the impact of changes in the value of our common stock on the amounts owed to participants.

Change in fair value of coal derivatives and coal trading activities, net. Losses for the
third quarter of 2008 relate to the net impact of our coal trading activities and the change in
fair value of other coal derivatives that have not been designated as hedge instruments in a
hedging relationship. Our coal trading function enabled us to capture the benefit of the movements
in the coal markets and generated significant gains during the first half of 2008, some of which
were lost in the third quarter of 2008 due to a downturn in the over-the-counter coal markets
during the quarter.

Other operating (income) expense, net. The variance between the net other operating expense
in the third quarter of 2008 and the net other operating income in the third quarter of 2007 is
primarily the result of a $2.8 million expense related to commercial settlements in the third
quarter of 2008 to free up metallurgical coal volumes and $1.2 million of income from the
resolution of a contractual issue with a customer in the third quarter of 2007.

Operating segment results. The following table shows results by operating segment for the
three months ended September 30, 2008 and compares those amounts to the comparable information for
the three months ended September 30, 2007:

Three Months Ended September 30

Increase (Decrease)

2008

2007

$

%

(Tons in thousands)

Powder River Basin

Tons sold

26,152

25,923

229

0.9

%

Coal sales realization per ton sold (1)

$

11.21

$

10.66

$

0.55

5.2

%

Operating margin per ton sold (2)

$

0.81

$

1.25

$

(0.44

)

(35.2

)%

Western Bituminous

Tons sold

5,135

5,057

78

1.5

%

Coal sales realization per ton sold (1)

$

26.76

$

25.16

$

1.60

6.4

%

Operating margin per ton sold (2)

$

4.08

$

4.43

$

(0.35

)

(7.9

)%

Central Appalachia

Tons sold

3,951

3,742

209

5.6

%

Coal sales realization per ton sold (1)

$

75.16

$

46.14

$

29.02

62.9

%

Operating margin per ton sold (2)

$

22.22

$

2.33

$

19.89

853.6

%

(1)

Coal sales prices per ton exclude certain transportation costs that we pass through
to our customers. We use these financial measures because we believe the amounts as adjusted
better represent the coal sales prices we achieved within our operating segments. Since other
companies may calculate coal sales prices per ton differently, our calculation may not be
comparable to similarly titled measures used by those companies. For the three months ended
September 30, 2008, transportation costs per ton were $0.02 for the Powder River Basin, $4.60
for the Western Bituminous region and $4.82 for Central Appalachia. Transportation costs per
ton for the three months ended September 30, 2007 were $0.02 for the Powder River Basin, $3.30
for the Western Bituminous region and $1.50 for Central Appalachia.

(2)

Operating margin per ton is calculated as the result of coal sales revenues less
cost of coal sales and depreciation, depletion and amortization divided by tons sold.

Powder River Basin  Sales volume in the Powder River Basin was slightly higher in the third
quarter of 2008 when compared to the third quarter of 2007. In 2007, our production levels
reflected planned reductions due to market conditions. Increases in sales prices during the third
quarter of 2008 when compared with the third quarter of 2007 reflect higher pricing on contract and
market index-priced tons, partially offset by the effect of lower sulfur

dioxide emission allowance prices. On a per-ton basis, operating margins in the third quarter
of 2008 decreased from the third quarter of 2007 due to an increase in per-ton costs, which offset
the contribution from higher sales prices. The increase in per-ton costs resulted primarily from
higher diesel fuel and explosives prices, higher repairs and maintenance costs due to work on
planned projects and higher labor costs.

Western Bituminous  In the Western Bituminous region, sales volume increased slightly during
the third quarter of 2008 when compared with the third quarter of 2007, however, production during
the third quarter of 2008 was lower than the third quarter of 2007 due to two longwall moves, one
of extended timing. Higher sales prices during the third quarter of 2008 represent higher contract
pricing that was achieved after the roll off of lower-priced legacy contracts. Higher sales prices
were offset by higher per-ton operating costs, resulting in a decrease in operating margin per ton
sold. Higher per-ton operating costs resulted from a decrease in production as a result of the
extended longwall move, higher labor and repair and maintenance costs and an increase in
depreciation, depletion and amortization.

Central Appalachia  Our sales volumes in Central Appalachia increased during the third
quarter of 2008 when compared with the third quarter of 2007 primarily due to the commencement of
production at our Mountain Laurel complex at the beginning of the fourth quarter of 2007, partially
offset by a decrease in tons from brokerage activity. Higher realized prices in the third quarter
of 2008 reflect the increase in metallurgical coal volume and the higher overall pricing on
metallurgical and steam coal sales. Our coal volumes sold into metallurgical markets were 1.3
million tons in the third quarter of 2008 compared to 0.4 million tons in the third quarter of
2007. Operating margins per ton for the third quarter of 2008 increased from the third quarter of
2007 due to the increase in sales prices, net of the impact of higher sales-sensitive costs, and a
decrease in other cash costs per-ton. Our average cost per ton at Mountain Laurel is lower than
our average cost per ton for the region, which resulted in lower cash costs per ton, exclusive of
sales-sensitive costs, in the third quarter of 2008 compared to the third quarter of 2007. These
margin improvements were partially offset by the effect of higher depreciation, depletion and
amortization costs, primarily from the commencement of production at the Mountain Laurel complex.

Net interest expense. The following table summarizes our net interest expense for the three
months ended September 30, 2008 and compares that information to the comparable information for the
three months ended September 30, 2007:

Increase (Decrease) in Net

Three Months Ended September 30

Income

2008

2007

$

%

(Amounts in thousands)

Interest expense

$

(17,019

)

$

(17,151

)

$

132

(0.8

)%

Interest income

235

513

(278

)

(54.2

)%

$

(16,784

)

$

(16,638

)

$

(146

)

(0.9

)%

Net interest expense was relatively flat during the third quarter of 2008 compared to the
third quarter of 2007. Lower interest expense, resulting from a reduction in our average borrowing
rate in the third quarter of 2008 compared to the third quarter of 2007, was mostly offset by a
decrease in interest capitalized during 2008. We capitalized $3.6 million of interest during the
three months ended September 30, 2008 and $6.1 million during the three months ended September 30,
2007. For more information on our ongoing capital improvement and development projects, see
Liquidity and Capital Resources beginning on page 20.

Other non-operating expense. Amounts reported as non-operating consist of income or expense
resulting from our financing activities other than interest. We previously had amounts deferred
from the termination of hedge accounting related to interest rate swaps, and other non-operating
expense for the three months ended September 30, 2007 represents the amortization of the amounts
that had previously been deferred.

Income taxes. The following table summarizes our income tax expense (benefit) for the three
months ended September 30, 2008 and compares that information to the comparable information for the
three months ended September 30, 2007:

Three Months Ended September 30

Increase in Net Income

2008

2007

$

%

(Amounts in thousands)

Provision for (benefit from) income taxes

$

(26,881

)

$

5,100

$

31,981

627.1

%

The benefit from income taxes in the third quarter of 2008 includes a $52.6 million reduction
in our valuation allowance against net operating loss and alternative minimum tax credit
carryforwards as a result of a reassessment of the Companys ability to utilize these credits. The
reassessment was triggered by the settlement with the IRS discussed previously.

Our effective tax rate is sensitive to changes in estimates of annual profitability and the
deduction for percentage depletion. An increase in the effective rate from the third quarter of
2007 to the third quarter of 2008, exclusive of the valuation allowance reduction, resulted from
the impact of percentage depletion.

Summary. Our results during the nine months ended September 30, 2008 when compared to the
nine months ended September 30, 2007 were influenced primarily by stronger market conditions, the
impact of our coal trading activities and the reduction in the valuation allowance against deferred
tax assets, offset in part by an upward pressure on commodity costs and higher depreciation,
depletion and amortization costs.

Revenues. The following table summarizes information about coal sales during the nine months
ended September 30, 2008 and compares those results to the comparable information for the nine
months ended September 30, 2007:

Nine Months Ended September 30

Increase

2008

2007

$

%

(Amounts in thousands, except per ton data)

Coal sales

$

2,253,925

$

1,769,245

$

484,680

27.4

%

Tons sold

104,887

100,748

4,139

4.1

%

Coal sales realization per ton sold

$

21.49

$

17.56

$

3.93

22.4

%

Coal sales. Coal sales increased from the first nine months of 2007 to the first nine months
of 2008 due to higher price realizations across all segments, a greater percentage of metallurgical
coal sales in Central Appalachia and higher sales volumes. We have provided more information about
the tons sold and the coal sales realizations per ton by operating segment under the heading
Operating segment results beginning on page 18.

Expenses, costs and other. The following table summarizes expenses, costs, changes in fair
value of coal derivatives and coal trading activities, net, and other operating income, net for the
nine months ended September 30, 2008 and compares those results to the comparable information for
the nine months ended September 30, 2007:

Cost of coal sales. Our cost of coal sales increased from the first nine months of 2007 to the
first nine months of 2008 primarily due to the increase in sales volumes, an increase in
transportation costs due to increased barge and export sales, higher sales-sensitive costs and
higher per-ton production costs in the Powder River Basin. We have provided more information about
our operating segments under the heading Operating segment results beginning on page 18.

Depreciation, depletion and amortization. The increase in depreciation, depletion and
amortization expense

from the first nine months of 2007 to the first nine months of 2008 is due primarily to the
costs of capital improvement and mine development projects that we capitalized in 2007 and 2008. We
have provided more information about our operating segments under the heading Operating segment
results below and our capital spending in the section entitled Liquidity and Capital Resources
beginning on page 20.

Selling, general and administrative expenses. The increase in selling, general and
administrative expenses from the first nine months of 2007 to the first nine months of 2008 is due
primarily to increases in employee incentive compensation costs of $12.8 million, industry group
dues of $3.8 million, travel costs of $2.7 million and other employee compensation costs of $1.2
million.

Change in fair value of coal derivatives and coal trading activities, net. Gains for the
first nine months of 2008 relate to the net impact of our coal trading activities and the change in
fair value of other coal derivatives that have not been designated as hedge instruments in a
hedging relationship. Our coal trading function enabled us to capture the benefit of the price
movements in the coal markets during the first nine months of 2008.

Other operating income, net. The decrease in net income from changes in other operating
income, net in the first nine months of 2008 compared to the first nine months of 2007 is due
primarily to a gain in 2007 of $9.1 million on the disposition of the Mingo Logan  Ben Creek
property, gains in 2007 of $8.4 million related to the sale of non-core reserves in the Powder
River Basin and Central Appalachia and a decrease of $2.8 million related to the value of the
assets supporting our deferred compensation plan.

Operating segment results. The following table shows results by operating segment for the
nine months ended September 30, 2008 and compares those amounts to the comparable information for
the nine months ended September 30, 2007:

Nine Months Ended September 30

Increase (Decrease)

2008

2007

$

%

(Tons in thousands)

Powder River Basin

Tons sold

76,726

74,032

2,694

3.6

%

Coal sales realization per ton sold (3)

$

11.25

$

10.55

$

0.70

6.6

%

Operating margin per ton sold (4)

$

.99

$

1.21

$

(0.22

)

(18.2

)%

Western Bituminous

Tons sold

15,909

14,777

1,132

7.7

%

Coal sales realization per ton sold (3)

$

27.89

$

24.69

$

3.20

13.0

%

Operating margin per ton sold (4)

$

6.12

$

4.46

$

1.66

37.2

%

Central Appalachia

Tons sold

12,253

11,939

314

2.6

%

Coal sales realization per ton sold (3)

$

66.77

$

46.77

$

20.00

42.8

%

Operating margin per ton sold (4)

$

17.55

$

2.72

$

14.83

545.2

%

(3)

Coal sales prices per ton exclude certain transportation costs that we pass through
to our customers. We use these financial measures because we believe the amounts as adjusted
better represent the coal sales prices we achieved within our operating segments. Since other
companies may calculate coal sales prices per ton differently, our calculation may not be
comparable to similarly titled measures used by those companies. For the period ended
September 30, 2008, transportation costs per ton were $0.03 for the Powder River Basin, $4.65
for the Western Bituminous region and $4.28 for Central Appalachia. Transportation costs per
ton for the period ended September 30, 2007 were $0.04 for the Powder River Basin, $3.13 for
the Western Bituminous region and $1.33 for Central Appalachia.

(4)

Operating margin per ton is calculated as the result of coal sales revenues less
cost of coal sales and depreciation, depletion and amortization divided by tons sold.

Powder River Basin  Sales volume in the Powder River Basin was higher in the first nine
months of 2008 when compared to the first nine months of 2007 due primarily to planned production
cutbacks in 2007 in response to weak market conditions. Increases in sales prices during the first
nine months of 2008 when compared with the first nine months of 2007 reflect higher pricing on
contract and market index-priced tons, partially offset by the effect of lower sulfur dioxide
emission allowance prices. On a per-ton basis, operating margins for the nine months ended
September 30, 2008 decreased from the nine months ended September 30, 2007 due to an increase in
per-ton costs, which offset the contribution of higher sales prices. The increase in per-ton costs
resulted primarily from higher diesel fuel and explosives prices, and higher sales-sensitive costs,
the cost of planned repair and maintenance projects and labor costs.

Western Bituminous  In the Western Bituminous region, sales volume increased during the first
nine months of 2008 when compared with the first nine months of 2007, driven largely by increased
demand in the region.

Higher sales prices during the first nine months of 2008 when compared with the first nine
months of 2007 resulted from higher contract pricing from the roll off of lower-priced legacy
contracts and the effect of market-based spot sales during the first nine months of 2008. Higher
sales prices resulted in higher per-ton operating margins for the first nine months of 2008
compared to the first nine months of 2007, partially offset by an increase in depreciation,
depletion and amortization and the impact of higher sales-sensitive costs.

Central Appalachia  Our sales volumes in Central Appalachia increased during the first nine
months of 2008 when compared with the first nine months of 2007 primarily due to the commencement
of production at our Mountain Laurel complex at the beginning of the fourth quarter of 2007. Sales
from our Mountain Laurel complex during the first nine months of 2008 exceeded the sales volume
from our former Mingo Logan-Ben Creek facility, which we sold at the end of the second quarter of
2007. Higher realized prices in the first nine months of 2008 reflect the increase in
metallurgical coal volume and higher overall pricing on metallurgical and steam coal sales. Our
coal volumes sold into metallurgical markets were 3.5 million tons in the first nine months of 2008
compared to 1.3 million tons in the first nine months of 2007. Operating margins per ton for the
first nine months of 2008 increased from the first nine months of 2007 due to the increase in sales
prices, net of the impact of higher sales-sensitive costs, and a decrease in cash costs per-ton.
Our costs of production at Mountain Laurel are lower than our average for the region, which
resulted in lower cash costs per ton, exclusive of sales-sensitive costs, in the first nine months
of 2008 compared to the first nine months of 2007. These margin improvements were partially offset
by the effect of higher depreciation, depletion and amortization costs, primarily from Mountain
Laurel.

Net interest expense. The following table summarizes our net interest expense for the nine
months ended September 30, 2008 and compares that information to the comparable information for the
nine months ended September 30, 2007:

Nine Months Ended September 30

Decrease in Net Income

2008

2007

$

%

(Amounts in thousands)

Interest expense

$

(56,228

)

$

(53,142

)

$

(3,086

)

(5.8

)%

Interest income

1,128

1,637

(509

)

(31.1

)%

$

(55,100

)

$

(51,505

)

$

(3,595

)

(7.0

)%

During the first nine months of 2008 compared to the first nine months of 2007, slightly lower
interest on borrowings, resulting from a reduction in our average borrowing rate during 2008, was
offset by a decrease in interest capitalized during 2008. We capitalized $8.7 million of interest
during the nine months ended September 30, 2008 and $16.6 million during the nine months ended
September 30, 2007. For more information on our ongoing capital improvement and development
projects, see Liquidity and Capital Resources beginning on page 20.

Other non-operating expense. Amounts reported as non-operating consist of income or expense
resulting from our financing activities other than interest. We previously had amounts deferred
from the termination of hedge accounting related to interest rate swaps, and other non-operating
expense for the nine months ended September 30, 2007 represents the amortization of the amounts
that had previously been deferred.

Income taxes. The following table summarizes our income tax expense for the nine months ended
September 30, 2008 and compares that information to the comparable information for the nine months
ended September 30, 2007:

Nine Months Ended September 30

Decrease in Net Income

2008

2007

$

%

(Amounts in thousands)

Provision for income taxes

$

26,059

$

7,350

$

18,709

254.5

%

The provision for income taxes for the nine months ended September 30, 2008 is net of a $52.6
million reduction in our valuation allowance against net operating loss and alternative minimum tax
credit carryforwards. The reduction was the result of a reassessment of the Companys ability to
utilize these credits, triggered by the settlement with the IRS discussed previously.

Our effective tax rate is sensitive to changes in estimates of annual profitability and
percentage depletion. An increase in the effective rate from the first nine months of 2007 to the
first nine months of 2008, exclusive of the effect of the valuation allowance, is primarily the
result of the impact of percentage depletion.

The recent crisis in the financial markets has had a significant adverse impact on a number of
financial institutions. In this credit environment, we expect our borrowing costs to increase and
our ability to issue commercial paper to be constrained. The ongoing uncertainty in the financial
markets may have an impact in the future on: security prices; the financial stability of our
customers and counterparties; availability under our lines of credit; the cost and availability of
insurance and financial surety programs, and pension plan funding requirements. At this point in
time, however, our liquidity has not been materially affected. We had available borrowing capacity
of approximately $620.0 million under our lines of credit at September 30, 2008. Management will
continue to closely monitor our own liquidity, credit markets and counterparty credit risk.
Management cannot predict with any certainty the impact to our liquidity of any further disruption
in the credit environment.

Liquidity and Capital Resources

Our primary sources of cash include sales of our coal production to customers, borrowings
under our credit facilities or other financing arrangements, and debt and equity offerings related
to significant transactions. Excluding any significant mineral reserve acquisitions, we generally
satisfy our working capital requirements and fund capital expenditures and debt-service obligations
with cash generated from operations or borrowings under our credit facilities, accounts receivable
securitization or commercial paper programs. The borrowings under these arrangements are
classified as current if the underlying credit facilities expire within one year or if, based on
cash projections and management plans, we do not have the intent to replace them on a long-term
basis. Such plans are subject to change based on our cash needs.

We believe that cash generated from operations and borrowings under our credit facilities or
other financing arrangements will be sufficient to meet working capital requirements, anticipated
capital expenditures and scheduled debt payments for at least the next several years. Our ability
to satisfy debt service obligations, to fund planned capital expenditures, to make acquisitions, to
repurchase our common shares and to pay dividends will depend upon our future operating
performance, which will be affected by prevailing economic conditions in the coal industry and
financial, business and other factors, some of which are beyond our control.

The following is a summary of cash provided by or used in each of the indicated types of
activities during the respective periods:

Nine Months Ended September 30

2008

2007

(in thousands)

Cash provided by (used in):

Operating activities

$

508,094

$

264,382

Investing activities

(434,147

)

(360,225

)

Financing activities

(37,961

)

96,709

Cash provided by operating activities was $508.1 million, an increase of $243.7 million in the
first nine months of 2008 compared to the first nine months of 2007, primarily as a result of our
increased profitability during 2008.

Cash used in investing activities for the first nine months of 2008 was $434.1 million, $73.9
million more than was used in investing activities for the first nine months of 2007. Proceeds
from asset sales were $69.9 million during the first nine months of 2007, compared to $1.1 million
in the first nine months of 2008. Our proceeds from asset sales in 2007 included $43.5 million
related to the sale of the Mingo Logan-Ben Creek complex and $26.0 million from the sale of
non-core reserves in the Powder River Basin and Central Appalachia. Capital expenditures decreased
$9.8 million during the first nine months of 2008 compared to the first nine months of 2007.
During the first nine months of 2007 and 2008, we made the third and fourth of five annual payments
of $122.2 million on the Little Thunder federal coal lease in Wyoming. Additionally, in the first
nine months of 2008, we spent approximately $78.4 million on the construction of a new loadout
facility at our Black Thunder mine in Wyoming and $101.2 million for the transition to a new
reserve area at our West Elk mining complex in Colorado, including the cost of purchasing a new
longwall and other mining equipment. We expect to complete the work on the loadout facility and to
transition to the new seam at West Elk in the fourth quarter of 2008.

In the first nine months of 2007, in addition to the third payment on the Little Thunder
lease, we acquired property and reserves in Illinois for $38.9 million, spent approximately $140.4
million on the development of the

Mountain Laurel complex in Central Appalachia, and made payments of approximately $33.9
million for a new longwall at our Sufco mine in Utah. Also during the first nine months of 2007,
we recovered $18.3 million from the lease of equipment in the Powder River Basin on which we had
previously made deposits to purchase the equipment.

Cash used in financing activities was $38.0 million during the first nine months of 2008
compared to cash provided by financing activities of $96.7 million during the first nine months of
2007, due to improved operating cash flows. We borrowed $50.9 million under our commercial paper
program and under lines of credit during the first nine months of 2008, $83.2 million less than in
the first nine months of 2007. During the third quarter of 2008, Standard and Poors Rating
Services raised our corporate credit rating to BB from BB-, which should have a beneficial
impact on our cost of borrowing. Our average cost of borrowing during the nine months ended
September 30, 2008 was 6.40% compared to an average cost of borrowing of 7.13% during the nine
months ended September 30, 2007. In April 2008, we increased our commercial paper program to
$100.0 million and in May 2008, we increased our limit under the accounts receivable securitization
program to $175.0 million.

During the third quarter of 2008, we repurchased 1.5 million shares of common stock under our
share repurchase program at an average price of $35.62. We paid $47.9 million during the quarter,
with the remaining $5.9 million to be paid in the fourth quarter. During the first nine months of
2008, we paid dividends of $36.0 million, an increase of $7.3 million when compared to the first
nine months of 2007, due to an increase in the dividend rate from $0.06 per share to $0.07 per
share in April 2007 and from $0.07 per share to $0.09 per share in April 2008.

In light of the current credit markets, we strengthened our liquidity position by building a
cash balance of $41.0 million as of September 30, 2008 and by diversifying our borrowings among our
lines of credit. While we expect our ability to issue commercial paper will be affected by the
current credit markets, we believe we have sufficient liquidity under our credit facilities. We
had available borrowing capacity of approximately $620.0 million under our lines of credit at
September 30, 2008.

Ratio of Earnings to Fixed Charges

The following table sets forth our ratios of earnings to combined fixed charges and preference
dividends for the periods indicated:

Nine Months Ended

September 30

2008

2007

Ratio of earnings to combined fixed charges and preference dividends

5.70x

2.21x

(1)

Earnings consist of income from continuing operations before income taxes and are
adjusted to include only distributed income from affiliates accounted for on the equity
method and fixed charges (excluding capitalized interest). Fixed charges consist of interest
incurred on indebtedness, the portion of operating lease rentals deemed representative of the
interest factor and the amortization of debt expense.

Critical Accounting Policies

On January 1, 2008, we adopted Financial Accounting Standards Board Statement No. 157, Fair
Value Measurements, which we refer to as Statement No. 157. Statement No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements under other accounting pronouncements that require or permit fair value measurements.
Statement No. 157 was adopted prospectively for our financial instruments. The effective date of
Statement No. 157 was deferred for one year for nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring basis, which we
will adopt effective January 1, 2009.

Other than the adoption of Statement No. 157, there have been no significant changes to our
critical accounting policies during the nine months ended September 30, 2008.

Fair Value Measurements

To the extent possible, we use quoted prices in active markets for identical assets to value
assets and liabilities recorded at fair value on a recurring basis. We are able to use this
methodology to value investments in equity securities and exchange traded coal contracts. To
determine the fair value of other commodity contracts not traded on an exchange (coal and heating
oil), we use quoted prices in the over-the-counter market or direct broker quotes. Certain
commodity contracts are valued using modeling techniques, such as Black-Scholes, that require the
use of inputs, primarily volatility, that are not observable, but are based on assumptions that we
believe market participants

would use in valuing the asset or liability. Fair values are adjusted for counterparty credit
risk.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We manage our commodity price risk for our non-trading, long-term coal contract portfolio
primarily through the use of long-term coal supply agreements. At September 30, 2008, our expected
unpriced production approximated between 30 million and 40 million tons in 2009 and between 75
million and 85 million tons in 2010.

We are exposed to commodity price risk in our coal trading activities, which represents the
potential loss that could be caused by an adverse change in the market value of coal. We have
attempted to limit the losses that we would incur should market prices drop below a certain level.
With respect to our coal trading positions, a 10% decrease in PRB coal prices and a 20% decrease in
Eastern coal prices from their levels at September 30, 2008 would result in an approximately $7.0
million decrease in the fair value of our coal trading positions. The timing of the estimated
future settlements of our trading portfolio is 17% in the remainder of 2008, 61% in 2009 and 22% in
2010.

We are also exposed to the risk of fluctuations in cash flows related to our purchase of
diesel fuel. We use approximately 45 million gallons of diesel fuel annually in our operations. We
enter into forward physical purchase contracts and heating oil swaps and options to reduce
volatility in the price of diesel fuel for our operations, and in doing so had protected
approximately 68% of our forecasted purchases for the remainder of
2008 and 53% of our forecasted purchases for 2009 at September 30, 2008. At December 31,
2007, we had protected approximately 23% of our forecasted purchases for 2008. The swap agreements
essentially fix the price paid for diesel fuel by requiring us to pay a fixed heating oil price and
receive a floating heating oil price. The call options protect against increases in diesel fuel by
granting us the right to participate in increases in heating oil prices. The changes in the
floating heating oil price highly correlate to changes in diesel fuel prices. Accordingly, the
derivatives qualify for hedge accounting and the changes in the fair value of the derivatives are
recorded through other comprehensive income. At September 30,
2008, a $0.25 per gallon decrease in
the price of heating oil would result in an increase of approximately
$7.0 million in our expense in 2009 resulting
from heating oil derivatives, which would be offset by a decrease in the cost of our physical
diesel purchases.

In addition to the other quantitative and qualitative disclosures about market risk contained
in this report, you should see Item 7A of our Annual Report on Form 10-K for the year ended
December 31, 2007. There have been no other material changes in our exposure to market risk since
December 31, 2007.

Item 4. Controls and Procedures.

We performed an evaluation under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of September 30, 2008. Based on
that evaluation, our management, including our chief executive officer and chief financial officer,
concluded that the disclosure controls and procedures were effective as of such date. There were
no changes in internal control over financial reporting that occurred during our fiscal quarter
ended September 30, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

We are involved in various claims and legal actions in the ordinary course of business. In
the opinion of management, the outcome of such ordinary course of business proceedings and
litigation currently pending will not have a material adverse effect on our results of operations
or financial results.

You should see Part I, Item 3 of our Annual Report on Form 10-K for the year ended December
31, 2007 and Part II, Item 1 of the Quarterly Reports on Form 10-Q that we have filed during the
subsequent interim periods for more information about some of the proceedings and litigation in
which we are involved.

Item 1A. Risk Factors.

Our business inherently involves certain risks and uncertainties. The risks and uncertainties
described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007 and in
the Quarterly Reports on Form 10-Q that we file during the interim periods are not the only ones we
face. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations. Should
one or more of any of these risks materialize, our business, financial condition, results of
operations or liquidity could be materially adversely affected.

The following table summarizes information about shares of our common stock that we purchased
during the third quarter of 2008.

Total Number of

Approximate Dollar

Shares Purchased

Value of Shares That

Average Price

As Part of our

May Yet be Purchased

Total Number of

Paid Per

Share Repurchase

Under Our Share

Period

Shares Purchased

Share

Program(1)

Repurchase Program

Jul. 1  Jul. 31, 2008





Aug. 1  Aug. 31, 2008





Sep. 1  Sep. 30, 2008

1,511,800

$

35.62

1,511,800

Total

1,511,800

1,511,800

$

225,289,996

(2)

(1)

In September 2006, our board of directors authorized a share repurchase program for
the purchase of up to 14,000,000 shares of our common stock. There is no expiration date on
the current authorization, and we have not made any decisions to suspend or cancel purchases
under the program. As of September 30, 2008, we have purchased 3,074,200 shares of our common
stock under this program.

(2)

Calculated using 10,925,800 shares of common stock that we may purchase under the
share repurchase program and $20.62, the closing price of our common stock as reported on the
New York Stock Exchange on November 5, 2008.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q:

Exhibit

Description

3.1

Restated Certificate of Incorporation of Arch Coal, Inc. (incorporated by reference
to Exhibit 3.1 of the registrants Current Report on Form 8-K filed on May 5,
2006).

3.2

Restated and Amended Bylaws of Arch Coal, Inc. (incorporated by reference to
Exhibit 3.2 of the registrants Annual Report on Form 10-K for the year ended
December 31, 2000).

12.1

Computation of ratio of earnings to combined fixed charges and preference dividends.